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Few understand the power of the investment allocation model, even in – especially in – times of crisis; but the power can be great when tied to a long-range financial plan.

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Jim Lorenzen, CFP®, AIF®

I can almost guarantee that not many people fully realize the power of an investment model as a means to fulfill a long-range financial plan, even in – or especially in – times of crisis.

The chances of a V-shaped recovery appear to be slim; not just because of the chances of a new spike in the pandemic due to possible premature reopening of the economy, it’s more about how market recoveries generally occur; yet, the power of the investment model remains unknown to many.

Many people intuitively believe that a 20% loss can be recaptured with a 20% gain; but, of course it’s not true. If you start out with $100, a 20% loss takes you down to $80. But, to get back to $100, you need to see your $80 grow by 25% ($20 ÷ $80). So, knowing that it takes a 25% gain to buy back a 20% loss, it’s easy to see why recoveries generally take longer than the original decline.

When we suffer declines in the market, it can be tempting for some people to sell on the way down in an attempt to cut their losses. The problem, of course is that calling the ‘bottom’ is difficult, because recoveries seldom occur in a straight line. Next thing they know, the recovery happened and they missed the rebound forcing them to buy back in at a new high. As you can see from this chart, a simple buy-and-hold philosophy would have been much easier without forcing them to become a market genius. After all, if Warren Buffett can’t time markets – and he says he can’t – than, why should we try?

That’s where the power of the investment allocation model comes in.

Those who’ve been smart enough to build their financial future with a blueprint tend to have a framework for fulfilling their long-range strategic plan. On the investment side of their planning, the foundation is an customized asset allocation. What few realize is that that allocation has an automatic buy low/sell high mechanism that comes built-in!

Let’s look at a simplified example:

Since we talking about stocks more than bonds, let’s use an example of a simple growth-oriented allocation that’s comprised of 70% stocks and 30% bonds, with the majority of the stocks in the domestic U.S. market (represented here using the S&P index) and a lesser amount in foreign stocks (represented here using a Europe, Asia, and Far East index).

Let’s assume our hypothetical investor has $500,000 invested. To make it simple, basic stock-bond allocation would look like this:

Stocks are now underweighted by 5% and bonds are now overweighted 5%. The great thing about models is that they can, and usually are, rebalanced on some type of schedule or according to some built-in protocol. To get back to our original allocation, money will have to be reallocated from bonds into stocks – the rebalancing ensures that we’re now buying low.

In order to get stocks back to their 70% weighting, we’ll need to bring the stock total to $301,000 ($430,000 x 70%). That will require moving $21,000 from bonds ($301,000 – $280,000). So, our rebalanced allocation is now:

Stocks: $301,000 = 70%Bonds: $129,000 = 30%Total: $430,000 = 100%

Now, over time, the stock market finally recovers the 25% needed to get back to where it was. That 25% gain in stocks adds $75,250 to stock value:

Stocks: $376,250 = 74%Bonds: $129,000 = 26%Total: $505,250 = 100%

Notice, we didn’t just get back to where we were before, we actually made money! We ‘beat the market’? How did that happen? The market returned to where it was but we ended-up ahead!

Rebalancing the investment model allowed us to buy low and sell high without being a market genius!

Now, of course, this is a over-simplified hypothetical (you can’t buy an index and I’ve ignored things like the time-frame involved, taxes, inflation, and a lot of other stuff), but, the concept is no less valid.

Oh, yes, rebalancing again now, getting us back to our original allocation, now means that we’re `selling high’ as the 4% overweighted stock money is now repositioned back to bonds until next time.

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER®professional and An Accredited Investment Fiduciary®in his 21st year of private practice as Founding Principal ofThe Independent Financial Group,a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742. IFG helps specializes in crafting wealth design strategies around life goals by using aproven planning processcoupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author. The Independent Financial Groupdoes not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

I wouldn’t. I also wouldn’t be driving in a strange city without a GPS.

Jim Lorenzen, CFP®, AIF®

It looks like the COVID-19 issue is going to be with us for awhile; the U.S. is still seeing over 25,000 new cases each day and some medical experts think we’re in a two-year process, which makes some sense considering the time it takes to get a vaccine into mass distribution, as well as getting the public to embrace it the way they did the polio vaccine in the 1950s.

Congress, of course, has been passing relief measures which, among some, are raising concerns about the national debt which now stands around at 100% of GDP while unemployment payments in excess of normal wages are creating a disincentive for some Americans to return to work until August, when those benefits are due to expire.

We’e in, of course, an ‘event-driven’ bear market which some would call a structural bear in that it is the result of a government-induced forced shut-down. Given that about 70% of our economy is driven by the consumer and no one knows when they will feel safe enough to work, shop, travel, and go to sporting events (a $12-billion industry) – not to mention the achievement of mass innoculation; some experts believe that the bear could last as long as 42 months.

Whenever economic crisis occurs – and it has on numerous occasions throughout history – the lesson comes home that building a financial house without a blueprint makes for bad construction and a poor outcome. That blueprint, of course, is a financial plan that serves as the foundation for an investment process – and a process is not a group of transactions. Today, of course, those who’ve done it the right way are seeing the value, and the power, of having a model to follow and stay within.

If you have a plan, make sure you keep it updated. If not, maybe it’s time to begin one. If you’d like some help, you can begin your process here.

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER®professional and An Accredited Investment Fiduciary®in his 21st year of private practice as Founding Principal ofThe Independent Financial Group,a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742. IFG helps specializes in crafting wealth design strategies around life goals by using aproven planning processcoupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author. The Independent Financial Groupdoes not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Everyone intuitively understands the need to have a balanced approach to meet retirement needs; however, it’s also important to address risk in light of the long term inflation risk.

Let’s take a hypothetical example using simple numbers. And, suppose after all the data gathering, goal setting, and risk assessments have been completed in the financial planning process, June and Ward Cleaver (yes, I am that old) have decided they feel comfortable with a portfolio that’s comprised of 60% bonds and cash and 40% in stocks.

June and Ward are retiring today after over thirty years of working and saving—they’ve done a lot of thing right—and have accumulated a nest-egg of $1 million. So, in our simple example, that would indicate their money should be arranged with $600,000 allocated to bonds and cash, and $400,000 to stocks. Simple.

But, suppose the two of them also have Social Security income—maybe even pension income, as well. This additional ongoing cash flow shouldn’t be ignored in constructing their allocation. Again, to keep numbers simple (I’m highly qualified for simple numbers). Let’s say Ward and June have an additional $30,000 in annual ongoing income to augment their savings.

What does that $30,000 annual income represent? How much would someone need to have invested to provide the same income?

Assuming a 4% annual withdrawal rate on assets – we’ll say that fits June and Ward’s situation – that $30,000 represents income on an additional $750,000 in assets… except these assets are illiquid: June and Ward can only take the income, they can’t ‘cash in’ the principal. It is like, in effect, an annuity, something some people use to simply ‘purchase’ a lifetime income. I’m not a big proponent, but they do have their place in some situations—but that’s another story.

Nevertheless, if we consider that $30,000 annual income as actually representing an additional asset, June and Ward really effectively have $1,750,000 in assets, $750,000 of which we’ll consider illiquid and providing an income of $30,000 at 4%, but it never runs out of money. If 60% of their total retirement ‘assets’ is to be allocated to bonds, their bond portfolio might now be $1,050,000 (60% of $1,750,000), $750,000 of which is already allocated and providing $30,000 in income.

That leaves $300,000 ($1,050,000 – $750,000) to be allocated to bonds from their nest-egg. This decreases their nest-egg bond and cash allocation from the original $600,000 to $300,000, and therefore raises their stock allocation from $400,000 to $700,000. If long-term inflation is an issue – and it is – then were June and Ward really risking being under-allocated to stocks?

The ‘guaranteed’ $30,000 cash flow, representing an illiquid asset, provides them with the ability, i.e., gives them the freedom, to still address short-term needs and objectives with $300,000, while allowing more money, $700,000) to address long-term inflation risk.

Historically, stocks have performed, simply because they represent the economic engine of the United States. And, it has never made sense to bet against the U.S.A. Pistons drive the engine and the engine provides forward movement.

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER®professional and An Accredited Investment Fiduciary®in his 21st year of private practice as Founding Principal ofThe Independent Financial Group,a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742. IFG helps specializes in crafting wealth design strategies around life goals by using aproven planning processcoupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author. The Independent Financial Groupdoes not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

For most people, there are certain times when events can feel overwhelming. For most of us, when it’s a money event (retirement plan rollover, selling property, winning the lottery, etc.) it’s usually when we think, ‘What do I do now? I don’t want to screw this up!”

Take your time. This is an emotional time…not the best time to be making important financial decisions. Short of meeting any required tax or legal deadlines, don’t make hasty decisions concerning your inheritance.

Identify a team of reputable, trusted advisors (attorney, accountant, financial/insurance advisors). There are complicated tax laws and requirements related to certain inherited assets. Without accurate, reliable advice, you may find an unnecessarily large chunk of your inheritance going to pay taxes.

Park the money. Deposit any inherited money or investments in a bank or brokerage account until you’re in a position to make definitive decisions on what you want to do with your inheritance.

Understand the tax consequences of inherited assets. If your inheritance is from a spouse, there may be no estate or inheritance taxes due. Otherwise, your inheritance may be subject to federal estate tax or state inheritance tax. Income taxes are also a consideration.

Treat inherited retirement assets with care. The tax treatment of inherited retirement assets is a complex subject. Make sure the retirement plan administrator does not send you a check for the retirement plan proceeds until you have made a distribution decision. Get sound professional financial and tax advice before taking any money from an inherited retirement plan…otherwise you may find yourself liable for paying income taxes on the entire value of the retirement account.

If you received an interest in a trust, familiarize yourself with the trust document and the terms under which you receive distributions from the trust, as well as with the trustee and trust administration fees.

Take stock. Create a financial inventory of your assets and your debts. Start with a clean slate and reassess your financial needs, objectives and goals.

Develop a financial plan. No one would begin building a home (ordering out materials and beginning construction) without a well thought out plan, blueprints, and a budget; so, why build your financial future without one?

Long-term plans don’t change just because temporary conditions do.

Consider working with a financial advisor (preferably a CERTIFIED FINANCIAL PLANNER® (CFP®) professional to “test drive” various scenarios and determine how your funds should be invested to accomplish your financial goals. Interest rates, markets, inflation, and taxes can all change. But, your plan, if tested, is like the lighthouse in the storm – if you’re plan has been stress-tested, it’s the one thing that won’t move when everything else seems to be in turmoil.

Evaluate your insurance needs. If you inherited valuable personal property, you will probably need to increase your property and casualty coverage or purchase new coverage. If your inheritance is substantial, consider increasing your liability insurance to protect against lawsuits. Finally, evaluate whether your life insurance needs have changed as a result of your inheritance.

Review your estate plan. Your inheritance, together with your experience in managing it, may lead you to make changes in your estate plan. Your experience in receiving an inheritance may prompt you to want to do a better job of how your estate is structured and administered for the benefit of your heirs.

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991. Jim is Founding Principal of The Independent Financial Group, a registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

The most common risk associated with all fixed-rate investments is interest rate risk. If interest rates rise—and the fed has already sent some pretty strong signals higher rates are on the way—investors could be stuck with the old lower rates, especially if the rate hikes occur during the penalty period.

This may not be a huge issue with CDs most people tend to “ladder” shorter-term CDs . Missing out on a half-point increase for six months is really an opportunity cost of 0.25%. The bigger problem, of course, is the loss of purchasing power on an after-tax basis.

Fixed annuities tend to have surrender charges with longer time spans—and therefore have a larger interest rate risk exposure. Penalty periods of five to ten years aren’t uncommon. Waiting several years through several potential rate increases can have a larger impact. The longer surrender period usually does come with higher interest crediting rates, to be sure; but, it’s worth doing the math—it’s hard to get ‘sold’ on longer terms and accompanying surrender charges when the outlook for increases is unknown. Given how long rates have been so low, a pendulum swing isn’t hard to believe. Remember, the insurance company’s annuity products purchased today will be backed by low-yielding bonds held today for most of the penalty period.

Fixed Indexed Annuities offer an opportunity for higher interest based on the performance of some outside index. Despite the fact many people choose the S&P500 index as the calculation benchmark, these products are not investments in the stock market. They are still insurance company IOUs paying a fixed rate—it’s just that the fixed rate paid each year is determined by the performance of the outside index; however, they always come with some limiting factor—usually a ‘cap’ on the amount they’ll credit or crediting based on some sort of ‘spread’ factor. Many professionals figure a fixed indexed annuity might actually return 1-2% more than it’s fixed-rate guarantee. So, one that offers a fixed rate of 4% might be expected to provide a long-term return of 5-6%; however, the return could be less. It all depends on the performance of the external index chosen, so short-terms carry more risk than long term, if history is any indication.

Remember, too, that insurance companies can change their crediting rates. Nevertheless, when you compare the expected return of an FIA to a 5-year CD, it’s still a popular alternative, providing other factors meet with your needs. Remember, however, longer-term products also mean longer-term interest rate exposure, as noted above.

Premium Bonuses, too, may not be as good as they sound. While they provide purchasing incentives, they virtually always result in lower crediting rates, further increasing interest rate risk. It may be better to seek a shorter-term product without a bonus that allows you to move to a higher rate product sooner. Why get stuck in a long-term contract?

Personal Take: Generally, whatever you want to accomplish with an annuity might be better accomplished in another way, often with greater liquidity and sometimes even better benefits. In any case, it pays to do your homework. Just as all investments can’t be good, all annuities aren’t necessarily bad. For many, the peace of mind knowing income is protected is worth the trade-off. Just remember, tax-deferred means tax postponed. Do YOU know what tax rates will be when you plan to begin taxable withdrawals? Neither do I.

Jim

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991. Jim is Founding Principal of The Independent Financial Group, a registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Remember the 1990s? That was when every business channel had multiple programs with business gurus picking and ranking mutual funds. It was a time when many mutual fund managers were becoming the ‘rock stars’ of financial meda. Everyone wanted to know what Peter Lynch, Bill Gross, and others were buying, selling, and saying.

If you were one of those following all those shows back then, you were no doubt thinking about your financial future. And, if you were born in the years following 1946, chances are you’re a ‘baby boomer’ – a term we’re all familiar with by now.

I read somewhere that there are 65,000 boomers turning age 65 every year! And, those turning 70-1/2 have hit a big landmark: It’s the year – actually it’s up until April 1st of the following year – Uncle Sam begins sticking his hand into your retirement account – after all, he is your partner; and, depending on your combined state and federal tax-bracket, his ownership share can be pretty significant, depending on the state you live in. Yes, that’s when you must begin taking required minimum distributions (RMDs).

By the way, if you do wait until April 1st of the following year, you’ll have to take TWO distributions in that year – one for the year you turned 70-1/2 and one for the current year. Naturally, taking two distributions could put you in a higher tax bracket; but, Uncle Sam won’t complain about that.

So, now that you’ve been advised of one trap that’s easy to fall into, what are some of the others? You might want to give these concerns some thought – worth discussing with your tax advisor, as well as your financial advisor.

Not all retirement accounts are alike.

IRA withdrawals, other than Roth IRAs, must be taken by December 31st of each year – and it doesn’t matter if you’re working or not (don’t forget, there is a first year exemption as noted earlier).

401(k) and 403(b) withdrawals can be deferred past age 70-1/2 provided you’re still working, you don’t own more than 5% of the company, and your employer’s plan allows this.

As noted, Roth IRAs have no RMD requirements. Important: If you’re in a Roth 401(k), those accounts are treated the same as other non-Roth accounts. The key here is to roll that balance into a Roth IRA where there will be no RMDs or taxation on withdrawals.

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Get the amount right!

The amount of your total RMD is based on the total value of all of your IRA balances requiring an RMD as of December 31st of the prior year. You can take your RMD from one account or split it any or all of the others. Important: This doesn’t apply to 401(k)s or other defined contribution (DC) plans… they have to be calculated separately and the appropriate withdrawals taken separately.

Remember: It’s not all yours!

You have a business partner in your 401(k), IRA, and/or any other tax-deferred plan: Uncle Sam owns part of your withdrawal. How much depends on your tax bracket – and he can change the rules without your consent any time he wants. Some partner. Chances are you will face either a full or partial tax, depending on how your IRA was funded – deductible or non-deductible contributions. Important: The onus is on you, not the IRS or your IRA custodian, to keep track of those numbers. Chances are your plan at work was funded with pretax money, making the entire RMD taxable at whatever your current rate is; and, as mentioned earlier, it’s possible your RMDs could put you in a higher tax bracket.

It’s all about provisional income and what sources of income are counted. The amount that’s above the threshold for your standard deduction and personal exemptions are counted. By the way – here’s something few people think about: While municipal bond interest may be tax-free, it IS counted as provisional income, which could raise your overall taxes, including how much tax you will pay on Social Security income. Talk to your tax advisor.

Watch the calendar.

If you fail to take it by December 31st of each year – even if you make a miscalculation on the amount and withdraw too little – the IRS may hit you with an excise tax of up to 50% of the amount you should have withdrawn! Oh, yes, you still have to take the distribution and pay tax on it, too! There have been occasions when the IRS has waived this penalty – floods, pestilence, bad advice, etc.

Remember to talk with your tax advisor. I am not a CPA or an attorney (and I don’t play one on tv); but, of course, these are issues that come up in retirement planning and wealth management quite often.

Happy retirement!

Jim

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991. Jim is Founding Principal of The Independent Financial Group, a registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

In my last post, a talked about how the financial planning profession has changed dramatically since I opened my first office in 1991; but, the financial services industry – not to be confused with the profession that operates alongside it – seems to have changed little, though it’s changed a lot.

I talked about how the financial product manufacturing, marketing, and sales channels represent an industry that exists alongside – not necessarily a part of – the financial planning profession. It doesn’t help, of course, that anyone can call themselves a financial planner – but I digress.

Alternative investments (alts) represent one example, which I discussed in the last post. Another alternative investment is deferred annuities.

People love guarantees. Marketers know this and the use of the word virtually always gets investors’ attention – particularly those who’ve amassed significant assets and are contemplating retirement.

The media – always on the alert for something they can hype or bash for ratings and typically lazy – find it easy to highlight high costs and shady salespeople. And, there’s some truth to that. Guaranteed income or withdrawal riders and equity indexed annuities do tend to have high costs. Often the guarantees that are less attractive than those presented.

The cost-benefit argument could, and probably will, go on forever. I have other issues. The first is, does an annuity make sense at all? – Any annuity. There’s no tax-deferral benefit if used inside an IRA and it limits your investment choices. They also often have surrender charges that enter into future decision-making; but, even when there are no surrender charges, the withdrawals can harm performance or even undermine the guarantees that were the focus of the sale.

For me, here’s the big issue: the annuity creates something most of my clients no longer want any more of – deferred income (who know what future tax rates will look like in 10-15 years as government deficits climb? Deferred income comes out first and is taxed at ordinary income tax rates.

Deferred income in non-qualified annuities (outside IRAs, etc., funded with normally taxable money) is income in respect of a decedent (IRD) and does not get a step-up in cost basis at the death of the holder – someone will pay taxes on the earnings and they may be in a higher tax bracket or the IRD may put them there.

There may be other ways to invest using alternative strategies. Options can work, but they also carry additional costs and risk.

Talk to your advisor – maybe one with recognized credentials and willing to take fiduciary status might be a good idea – to see what your plan should be.

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991. Jim is Founding Principal of The Independent Financial Group, a registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

The financial planning profession has changed dramatically since I opened my first office in 1991; but, the financial services industry – not to be confused with the profession that operates alongside it – seems to have changed little, though it’s changed a lot. What? I’ll explain.

The industry, comprised largely of product manufacturers and their sales arms (these days it seems anyone can say they’re a ‘financial advisor’), has a long track-record of constantly packaging new products to take advantage of a demand among investors that the product manufacturers create through their marketing. New ‘issues’ (created by marketing) give rise to new products to be sold to fill a marketing-driven demand. Changes in product innovation to generate new sales is the constant that never changes.

This doesn’t mean it’s all bad; it’s just that it can be difficult for spectators to recognize the game without a program.

Alternative investments get a lot of press these days – especially if there’s a perceived risk of a down or bear market… a perception that’s convenient to exploit at almost any point in time. The media likes ratings, so profiling people that called a market top or decline – and made money – is always good for attracting an audience. And, since there’s always someone on each side of a trade, finding someone on the right side isn’t difficult.

I’ve always felt that many fund managers operate like baseball free agents. Being on the right side of a call gets them on tv, which in turn attracts new assets, which in turn leads to bigger year-end bonuses. I could be wrong, or not.

Many captive “advisors” are putting their clients into “alts” these days because their employer firms (the distribution arm for the product manufacturer) are emphasizing them.

My sales pitch for alternatives: With alternatives, you can have higher costs, greater dependency on a fund manager’s clairvoyance, less transparency, low tax-efficiency, and limited access to your money! What do you think?

Don’t get me wrong. It’s not a black and white decision. They can have a place in a well-designed portfolio; and, while many endowment funds and the ultra-wealthy do tend to own alts, most of us aren’t among the ultra-wealthy and risk mitigation is important.

More about alternatives next time.

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991. Jim is Founding Principal of The Independent Financial Group, a registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

IRA mistakes generally revolve around errors associated with required minimum distributions (RMDs), hardship distributions, and distributions involving pre-tax vs. after-tax funds; but rollover errors can create special headaches. Ineligible rollovers are often taxable (unless they are after-tax funds) and could be subject to a 10% IRS penalty. Not good.

According to retirement expert Ed Slott[i], the biggest three ineligible rollovers are:

> Violations of the one-per-year IRA rollover rule

> Missing the 60-day rollover deadline.

> Distributions to non-spouse beneficiaries (a non-spouse beneficiary can never do a rollover. The funds must be moved as direct transfers).

Those are only the top three; but there are many other lesser-known rollover tax-traps. If you’re retiring and planning a rollover, you might consider getting professional help. You can find a CERTIFIED FINANCIAL PLANNER® (CFP®) professional here.

[i] El Slott is a CPA based in Rockville Centre, New York, who has appeared on PBS and is the author of several books on IRAs.

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991. Jim is Founding Principal of The Independent Financial Group, a registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Many people who’ve enjoyed their employers’ guaranteed retirement pensions probably never gave much thought to the fact that some of their compensation was being diverted into an account that would fund the pension – and I’ll bet even fewer suspected that their pension was likely being funded with an annuity purchased by their employer. They would have hated purchasing an annuity themselves; but, they love the pension.

But there is an anti-annuity bias existing among many, if not most, investors. And this is despite the fact that there are certain realities we all face:

We don’t know how long we will live – we face longevity risk, the risk of running out of money.

When the ‘bad return years’ will occur (Murphy’s Law) – that’s called sequence of returns risk.

If and when unexpected financial disasters might occur – health issues, roof and air/heating go kaput at the same time (Murphy’s Law again).

The good news is the use of an immediate or deferred annuity can help solve many concerns, particularly the first two above – the income is for life and market returns won’t affect that income. This is why many refer to their use as a ‘personal pension plan’.

But, there is no such thing as the perfect investment – at least I haven’t found it (and I’ve been looking on behalf of clients for more than 27 years).

Every investment on the planet has a set of characteristics. It’s generally not a question of what’s ‘good’ or ‘bad’; it’s more of a question of whether (or not) the majority of those characteristics are appropriate and beneficial – or whether the majority are inconsistent with the client’s financial situation, as well as his/her goals and desires.

Sometimes, problems arise when people misconstrue the purpose of an annuity. Instead of focusing on the true purpose (providing an income for life), they often focus on the risk of dying before they receive all their money back. They hate the thought the insurance company might `win’. Despite the fact they hope they’ll never have a house fire (which would allow them to ‘collect’), they forget they’re really insuring against a risk (longevity) in the same way they insure their homes and cars.

Some focus on ‘returns’, conflating an annuity purchase with a bond. The truth is they’re not purchasing a stream of dividends or interest; they’re purchasing an income stream, i.e. cash flow for life – in effect, a return of principal and interest with one difference: It’s for life; it never runs out.

Another obstacle appears to be investors’ tendency to misprice the value of a guaranteed income for life. Few understand time-value of money and generally greatly underestimate the amount of money it takes to fund a monthly income for life. No wonder lottery winners tend to take the lump-sum and most people elect to take Social Security at 62.

Almost everyone would like a pension; but, few are willing to fund it – despite the fact that those who do have pensions and Social Security income did indeed fund those annuity payments with about 6% from each paycheck.

When one considers it takes a 25% return to buy-back a 20% loss in the markets, guaranteed income for life can sound pretty good IF there’s a willingness to fund the income stream.

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Are fixed annuities right for everyone? No. Nothing is. Some academic research seems to support their use as a portfolio component for those with between $400,000 and $2 million; but, that’s academic theory, which often doesn’t translate well into the real world. Not everyone who fits this profile will have the same family situations, lifestyle requirements, health concerns, goals, yada, yada, yada.

It’s also worth remembering that annuities can be very complex products with a lot of moving parts – something that contributes to investor hesitancy. However, if you decide you want an annuity as part of your portfolio – talk this over with your advisor and be sure you understand how it will fit with your current formal retirement plan (or if it’s even needed) – a few key points are worth remembering:

A retirement annuity is not an investment; it’s a risk-transfer tool. You are purchasing a lifetime income stream and transferring longevity risk to the insurance company. It’s an insurance policy.

A retirement annuity should not be your total retirement strategy – it’s a supplement to your other planning, as well as Social Security.

Do not automatically assume annuities are good. Do not assume they are automatically bad. Simply see if and how this planning component could fit (or not) with your formal plan.

Finally, I can hear someone asking, “Do you recommend annuities to your clients?” My use of annuities in client portfolios can best be described as extremely rare. It’s not that annuities are bad; it’s more that, for one reason or another, they either haven’t been needed or there were other overriding issues that were more important. That doesn’t mean I wouldn’t recommend a particular annuity design if circumstances warranted – it’s just been a rare occurrence up to now.

Annuities can be confusing: Variable annuities are NOTHING like fixed annuities. An annuity linked to a market index is NOT a variable annuity – it’s actually a fixed annuity and it is NOT an investment in the stock market.

If you’re not sure, the best advice is to get professional help. After all, how many of us would stand in front of a mirror with a pair of pliers when we have a toothache?

Jim

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991. Jim is Founding Principal of The Independent Financial Group, a registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.